CLSA sounds note of caution on Genworth

Investors may not be appropriately rewarded for the risk of investing in financial services group Genworth, as the IPO of Australia’s biggest lenders mortgage insurer draws near.

That is the view of CLSA analyst Jan van der Schalk, who called Genworth a “risky business".

Van der Schalk noted that the Australian LMI market is the third largest in the world and forward pricing an asset bubble is very difficult.

“LMI requires a lot of capital, but given the essentially all-or-nothing nature of the risk, it is hard to have enough premium or capital adequacy when the hit comes. To compensate for this you need to be earning very high ROE’s i.e more than 15 per cent is reasonable," he wrote.

Australia’s market is dominated by two players – Genworth and QBE LMI.

The duopoly has led to a lack of innovation and the lack new capital, CLSA argues. It also raises concentration risk with the major banks starting to cherry pick the risks.

“The low ROC [return on capital] is problematic given the feast or famine nature of LMI," CLSA argued. “We think the experience of catastrophe insurers pricing to 15-20 per cent ROE is an appropriate benchmark for LMI providers."